Wednesday, December 14, 2005

Snow Job

On December 8, TaxProf had a nifty chart courtesy of Secretary of the Treasury John Snow which showed the increase in federal tax revenues since the passage of the 2003 Tax Act. The chart shows that federal tax revenues in FY 2005 increased by a whopping $260 billion or so from revenues in FY 2004. Don't be deceived.

Today, TaxProf links to the AP story on the amount of funds coming back to this country due to the one-time tax cut on repatriated foreign earnings (Companies Mum on How They Will Spend Funds). Apparently, the amount of repatriated earnings will be in excess of $300 billion.

I previously blogged on this windfall. In essence, there is a one-time reduction of tax on repatriated earnings from 35% to 5.25%. Applying a little simple arithmetic, it would seem that about $16 billion of the $260 billion in increased FY 2005 revenue is directly related to this one time accounting gambit. Bunching this income into 2005 merely allows the true revenue picture to be distorted. And, of course, over time, the acceleration of revenue into FY 2005 causes a net diminution of revenue over time in the approximate amount of $90 billion.

Even though the repatriated funds cannot be distributed to shareholders directly in the form of dividends, cash is fungible. Thus, the repatriated funds are, to some extent, being distributed as dividends, albeit not directly. (As the AP story reports: '''The tawdry secret about (repatriation) is that it is not likely to change domestic spending,' said Kevin Hassett, director of economic policy studies for the American Enterprise Institute.") Increased distribution of dividends further increases revenues in FY 2005, but in the same distortive way. At best, this part of the increase in revenue represents only an acceleration of the realization of the revenues, not an overall increase in revenues. In fact, over time, the aggregate amount of revenues received is likely to be lower, not higher.

Yes, there are other reasons for the increase in revenue, most particularly the fact that the business cycle came around and the economy has moved out of the recession that it was in. None of these other reasons give credence to the Orwellian nonsense that Snow is peddling that the Bush tax cuts created revenues. But a significant part of the revenue "increase" is due simply to accounting hocus-pocus and is not an increase at all.

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